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By Matt Hougan

I agree with Dave Nadig in principle. Closed-end funds are awful, but the PowerShares CEF Income Composite Portfolio (NYSEARCA:PCEF) is perhaps a bit less so. Where else can you get an 8 percent yield these days?

Let’s be honest: With bank accounts paying zero and the S&P 500 yielding peanuts, investors are looking for yield. And to get yield in these markets, you have to get your hands a little dirty.

If you run a sort on the highest-yielding ETFs right now, you come up with this list:

Highest-Yielding ETFs

Ticker

Name

Avg Dvd Yield

Assets ($USm)

iShares FTSE NAREIT Mortgage

REM

9.11

47.42

Claymore/S&P Global Dividend

LVL

8.50

13.62

PowerShares CEF Income Composite Portfolio

PCEF

8.50

N/A

SPDR S&P International Dividend

DWX

7.21

210.52

WisdomTree Pacific Ex-Japan

DNH

7.02

125.67

Claymore/BNY Mellon Euro-Pacific Leaders

EEN

6.86

4.38

PowerShares Asia Ex-Japan

PAF

6.60

39.58

WisdomTree International Comm. Sector

DGG

6.51

27.21

iShares DJ International Select Dividend

IDV

6.47

114.33

First Trust DJ Global Select Dividend

FGD

6.40

40.79

Claymore/Delta Global Shipping

SEA

6.32

131.62

As noted, the PowerShares ETF you ravaged in your recent blog promises an early-indication yield of about 8.5 percent. That ties it for second place among the highest-yielding ETFs at the moment. To earn a higher yield, you’d have to plow your money into the iShares FTSE NAREIT Mortgage Plus Capped ETF (NYSEARCA:REM), which yields 9.11 percent currently.

REM invests in companies that hold residential mortgages, mostly those underwritten by government-sponsored entities like Fannie Mae (FNM) and Freddie Mac (FRE). Its largest holding at more than 22 percent of the portfolio, Annaly Capital (NYSE:NLY), describes its business as follows:

“We invest in what we believe to be the premier asset-backed securities in the world - U.S. residential mortgage-backed securities issued and guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae. We enhance the return on our investment in these securities by using leverage.”

Not only residential mortgages, but leverage! No wonder the fund has lost about 70 percent of its value since its launch in the first half of 2007.

I like beaten-down funds as much as the next guy, but with the government likely to end its housing stimulus plan soon, unemployment still at 10 percent and Congress loath to give more funds to Fannie and Freddie, I might rather place my bets on the closed-end fund.

I’ll admit this, though: When you move beyond REM, you start running into some interesting funds. Who knew that the underlying companies in the WisdomTree Pacific Ex-Japan (DNH) ETF were yielding close to 7 percent? That’s not bad at all.

In the end, I don’t love closed-end funds either, Dave. In fact, I dislike them more than you do. To me, the real reason they exist is so brokers can sell them on commission. And honestly, I find that unconscionable. Investors regularly cough up 5 percent commissions to buy new CEFs that they could instead buy the next day at fair value or at a discount. Any adviser who recommends buying a CEF and paying a commission is doing their customer a disservice.

PCEF at least avoids this problem. And by only buying funds already trading at a discount, I’m not as sour on it as you appear to be.

Original post

Source: Down on CEFs but Not Necessarily on PCEF